Trade: The Unsung Hero

The GDP numbers show the vital role that trade has played in countering the nation’s economic ill health.

The revised GDP numbers came out last week and things look a bit brighter, despite persistent unemployment. After the economy shrank at a –5.4 percent rate in the fourth quarter of 2008 and then at a –6.4 percent rate in the first quarter of this year, the newly reported second quarter dip of –0.7 percent looks relatively mild.

So what’s behind the numbers? Must be the stimulus, right? Well, no. The actual hero is something of a surprise. It turns out it was…

We’ll come to that in a moment. As background, remember that you had three big stimuli hitting the economy earlier this year. First, even without the celebrated Obama stimulus package, our system has built-in stabilizers. In tough times, tax collections drop and spending goes up. Back in January, we could already see this effect was going to be substantial, with a forecast deficit of more than 8 percent of GDP. Second, the Federal Reserve was taking extraordinary measures to boost the economy. The Fed’s balance sheet ballooned from roughly $870 billion before the crisis to over $2 trillion now. Third, there was the president’s stimulus package. The headline number was $787 billion, which would seem to put it in the same ballpark with the other big boosts to the economy. But that amount is spent out over years. As of last week, Recovery.gov reported that just under $107 billion had been paid out, and that covers disbursements well into the third quarter of the year.

Last year, exports grew while imports shrank. Trade served as a shock absorber, making the impact of the year’s events less painful than it would otherwise have been.

Although the –0.7 percent GDP number grabs all the headlines, the actual release offers a lot more detail, for those who wish to dirty their hands with statistics. In the most interesting table, the Commerce Department folks distribute credit and blame for the headline number. Here we can see how all the broad subsectors of the economy pushed us forward or held us back. These are the numbers that add up to –0.7.

It’s not hard to find the laggards. Investment was awful, accounting for –3.1 percent growth. Consumption was tepid, coming in at –0.6 percent, pretty much on a par with the economy as a whole. So what counteracted the investment drag? There was government spending, to be sure. In total, it provided a 1.3 percent boost, which seems like evidence for stimulus advocates. But if we drill down into those government numbers, we find a catch: just over half was due to defense expenditures, which were not part of the stimulus. Federal non-defense expenditures accounted for a measly 0.15 percent. To be fair, though, some of the stimulus came as aid to states and localities, and their total spending added almost 0.5 percent.

That leaves one more category: exports and imports. Combined, they were the biggest driver of economic growth, accounting for 1.65 percent. This requires a little interpretation, since both exports and imports actually shrank, but imports shrank much more than exports. This means that, for a given level of consumption, we produced at home.

What counteracted the investment drag? Government spending provided a 1.3 percent boost, which seems like evidence for stimulus advocates.

This is not just a quirk of the second quarter of 2009. If we look back at all of 2008—as painful as that may be—the economy grew by 0.4 percent and trade accounted for 1.2 percent of GDP growth. Last year, exports grew while imports shrank. Trade served as a shock absorber, making the impact of the year’s events less painful than it would otherwise have been.

Trade’s critics have long argued that it costs jobs and that the trade deficit was evidence of the failure of America’s commercial policies. Over the last year, we have seen the deficit in goods and services halve, but unemployment steadily rise. The GDP numbers show the vital role that trade has played in countering the nation’s economic ill health.

The president’s supporters laud his ability to take in facts, set aside ideology, and formulate a pragmatic response. An embrace of international trade would be a refreshing change.

FURTHER READING: Levy wrote “Public Outrage as a Systemic Risk” on how without bankruptcy, it is hard to avoid rewarding failure, and “Banking on Delusion” on the odds of U.S. taxpayers ever getting their money back from GM.